Punters in China often in the dark
Professional traders who handle equity positions for major financial institutions can present an interesting study in investor behaviour. To make money on behalf of clients and employers, they generally adhere to the disciplines of a clear risk management framework. But in making choices and decisions for their personal portfolios, those guidelines and principles often go out the window.
'When acting for themselves, they become just like other individual retail investors and override their own rules every time,' says Alan Luk, once a trader and now head of private banking and trust services for Hang Seng Bank.
Most noticeable is the reluctance to cut losses. Instead of accepting the short-term consequences of a poor pick and selling up, the individual investor performs a neat mental revaluation. In this way, underperforming stocks unlikely to regain previous highs become 'investments for the long term'. And the discipline and clarity exhibited at the trading desk is somehow replaced by a woolly optimism about corporate prospects or the market outlook.
Over the years, Luk has seen this behaviour among peers and, these days, it is a trait he specifically tries to discourage among private banking customers.
'For example, mainland clients concentrate on certain asset classes which they think they know better than other people,' he says. 'As an adviser, it can be like talking to a wall. And they never want to cut losses, so you'd better not mention that during a dinner.'
More broadly, Angelina Kwan, another of the panellists at the latest HKUST/NYU Stern Global Finance Seminar, noticed during an 18-month stint with the China Securities Regulatory Commission (CSRC) in Beijing that the average mainland investor largely trades on rumour. Individuals may be funnelling significant sums into the equity markets, but they have little understanding of corporate governance or how to study the fundamentals.
'About 80 to 90 per cent of [mainland investors] are financially illiterate,' says Kwan, chief operating officer and executive managing director of Reorient Financial Markets. 'The regulators are dealing with a very uneducated group of retail investors who have a herd mentality.'
For this reason, institutions, regulators and advisers should make it a definite priority to upgrade the general level of knowledge about markets and the flow of useful information. In doing this, they should also aim to explain the value of investing discipline and diversification, to achieve better returns over the long term.
'Any individual investor wants to make as much money as possible,' Kwan says. 'But they also need to be educated about studying the 'story' of each company in order to sort the wheat from the chaff. Often, people in China don't have the minimum level of financial literacy to trade on their own account or to know when to cut losses.'